This invention relates generally to valuation methods for financial instruments and more particularly to rapid valuation of large numbers of financial instruments.
A large number of assets such as loans, e.g., ten thousand loans or other financial instruments, sometimes become available for sale due to economic conditions, the planned or unplanned divestiture of assets or as the result of legal remedies. The sale of thousands of commercial loans or other financial instruments sometimes involving the equivalent of billions of dollars in assets must sometimes occur within a few months. Of course, the seller of assets wants to optimize the value of the portfolio, and will sometimes group the assets in “tranches.” The term “tranche” as used herein is not limited to foreign notes but also includes assets and financial instrument groupings regardless of country or jurisdiction.
Bidders may submit bids on all tranches, or on only some tranches. In order to win a tranche, a bidder typically must submit the highest bid for that tranche. In connection with determining a bid amount to submit on a particular tranche, a bidder often will engage underwriters to evaluate as many loans as possible within a tranche and within the available limited time. When the time for submitting a bid is about to expire, the bidder will evaluate the loans underwritten at that time, and then attempt to extrapolate a value to the loans that have not then been analyzed by the underwriters.
As a result of this process, a bidder may significantly undervalue a tranche and submit a bid that is not competitive or bid higher than the underwritten value and assume unquantified risk. Of course, since the objective is to win each tranche at a price that enables a bidder to earn a return, losing a tranche due to significant undervaluation of the tranche represents a lost opportunity. It would be desirable to provide a system that facilitates accurate valuation of a large number of financial instruments in a short period of time and understand the associated probabilities of return for a given bid.
Traditionally, valuations performed in asset and business decisions are based upon forecasts which are discounted for the uncertainty of future cash flows. Improvements to this methodology include scenario generation for best, worst, most likely cases. In the last several years, well attributed assets with significant competitive market knowledge have been valued with option pricing methodologies. It would be desirable to generate a risk limiting “food chain” that selects the lowest variance assumption for asset valuation since known systems are limited in establishing the forecast probability distributions in the absence of comparative assets, especially in applications with a limited time duration in which to establish probabilities.